Section 197-Non-deduction/ Lower deduction of TDS:- To prevent taxpayers from evading taxes, the income tax provisions include TDS/TCS. These provisions provide tax rates for deductions, such as section 192, section 194, and section 195 (for non-residents).
Section 197-Non-deduction/ Lower deduction of TDS
The responsible person is responsible for deducting tax at specified rates either at the time of credit or payment, whichever is earlier, and the recipient pays the remaining amount. This helps prevent tax evasion and track taxpayer income. However, some taxpayers may face difficulties if their income is not taxable. This can happen if they fall under certain circumstances.
- If the taxpayer has suffered losses in the current fiscal year, they may not have to pay taxes as their income is not taxable.
- If the taxpayer has losses from previous years that can be set off against their current year’s income, they may not have to pay taxes as their income may not be taxable after the losses are set off.
- If the taxpayer is eligible for exemptions or deductions during the fiscal year, it may reduce their taxable income, and they may have to pay a lower amount of taxes.
If the taxpayer does not have any taxable income for the year due to the above circumstances, it may create issues when the source deducts tax, even though they may not have to pay taxes. TDS rates are generally determined for the entire population, including those with significant income, and this may cause undue burden for taxpayers who do not have taxable income. However, these taxpayers can claim a refund for the tax deducted at source.
Taxpayers who are eligible for a refund due to tax deducted at source, but who do not have taxable income, are entitled to receive interest on their refunds. However, the refund may be withheld until the taxpayer files their return to claim it, even if it is not mandatory for them to file under the law. Additionally, the taxpayer may have to go through the process of filing their return to claim the refund.
To avoid unnecessary difficulties for taxpayers in such situations, the income tax law allows for the option of obtaining a certificate from the assessing officer that confirms a lower rate of TDS or no TDS until the refund is received. This is governed by Section 197, and the decision depends on the specific facts of the case. In this article, we will examine the provisions for applying for a certificate for a lower TDS deduction.
What is Section 197?
Section 197 of the Income Tax Act, 1961 deals with the issuance of certificates for lower tax deduction or no tax deduction at source (TDS) for certain types of income.
Section 197 allows a person who is responsible for making a payment to a recipient to apply to the Assessing Officer (AO) for a certificate for lower TDS deduction or no TDS deduction at all if the recipient is eligible for such a certificate.
The Assessing Officer (AO) may grant a Tax Deduction at Source (TDS) Certificate if they determine that the total income of the recipient justifies the deduction of income tax at a lower rate or no deduction of tax. This certificate is commonly referred to as a “TDS Certificate”.
Once issued, the recipient can provide the TDS certificate to the person making the payment, who can then deduct tax at the lower rate or not deduct any tax, depending on the terms of the certificate.
Section 197 provides relief to taxpayers by reducing the burden of TDS, particularly in situations where the actual tax liability is lower than the prescribed TDS rate.
The provision of Section 197 covers eligible income under TDS.
The provisions of Section 197 can be utilized by the recipient of income in situations where TDS is mandatory under the following sections:
- Section 192 – Salary Income.
- Section 193 – Interest on securities.
- Section 194 – Dividend.
- Section 194A – Interest other than interest on securities.
- Section 194C – Payment to contractors.
- Section 194D – Insurance commission.
- Section 194G – Commission on sale of lottery tickets, etc.
- Section 194H – Commission or brokerage.
- Section 194-I – Rent.
- Section 194J – Fees for professional or technical services.
- Section 194LA – Compensation on acquisition of certain immovable property.
- Section 194LBB – Income in respect of units of investment fund.
- Section 194LBC – Income from investment in an equity-oriented fund.
- Section 195 – Income of non-residents.
Eligibility to apply under Section 197.
Section 197 enables a person to apply for non-deduction or reduced deduction of tax in cases where TDS is required under the applicable categories of income, and the income tax department deems it appropriate based on the recipient’s estimated final tax liability.
Timeline to apply
Although the income tax provisions do not prescribe a time limit for applying under Section 197, it is recommended to apply at the beginning of the financial year in cases of regular income as TDS is imposed on income for the current financial year. For lump sum income, the need to apply may arise during the entire financial year or as necessary.
The process of applying under Section 197
- To request permission for reduced or zero TDS deduction, an application in Form 13 must be submitted to the TDS Determination Officer. The form can be submitted either online or manually. Some regions such as Mumbai, Tamil Nadu, and Karnataka have enabled online filing of Form 13 to facilitate quick processing of applications for certificates of reduced or zero TDS deduction under Section 197(1) of the Income Tax Act, 1961.
- To ensure that the application is processed smoothly, it is advisable for the taxpayer to furnish accurate and complete details in the application.
- Once the application meets the satisfaction of the AO, they will initiate the process of issuing the certificate for low or no TDS deduction.
- Once the AO is satisfied with the application, they will issue the certificate, which can be given to the deductor along with the challan. This allows the deductor to make the correct and reduced deduction of tax.
Taxpayers in Karnataka can register and apply for a certificate for a lower TDS deduction or no TDS deduction at all online by logging in to TRACES. A step-by-step guide with screenshots is available for assistance.
Read More:-Understanding Section 206 of the Income Tax Act: A Comprehensive Guide to TDS Deduction
Validity of applications made under Section 197.
Once issued, a certificate under Section 197 is valid for the entire financial year in which it is issued, and it remains valid until the end of that financial year, unless the Assessing Officer (TDS) cancels it before the expiry date.
Documents submitted along with Form 13.
- Signed Form 13
- Copies of income tax returns for the past 3 financial years, along with annexures and schedules
- Copies of assessment orders for the past 3 financial years
- In cases of income from business or profession, copies of financial statements along with audit report for the past 3 financial years, if applicable
- Estimated profit and loss account for the current financial year
- Calculation of income for the past 3 financial years and estimated calculation for the current financial year
- Copy of PAN card
- Account number for all responsible parties for tax deduction to be paid by you
- E-TDS return for refund for the past 2 financial years
- Estimated income during the financial year
- Any other documents based on the nature of income
- First TDS default.
After the submission of the application to the Assessing Officer (TDS), the officer will process it within 30 days from the end of the month in which the application is received. The officer will review the documents and information provided and may request additional information before issuing the certificate or rejecting the application.
Section 197A
Individuals who are residents or persons who are not firms or companies may submit self-declarations on designated forms (Form 15G/Form 15H) for certain specified income categories to avoid TDS deduction, in addition to any person, including corporations, who can apply for section 197.
FAQ’s
What is certificate under section 197 of the Act?
Section 197 of the Income Tax Act provides a certificate issued by the Assessing Officer to enable a taxpayer to receive income from a specified source at a lower rate or without tax deduction. This certificate is issued in cases where the tax liability of the taxpayer is expected to be lower than the amount of tax that would be deducted at source. The certificate helps in avoiding the inconvenience of claiming a refund of excess tax deducted at source.
How do I get a certificate under section 197?
To get a certificate under section 197 of the Income Tax Act, you need to follow these steps:
1. Determine if you are eligible: You must first determine if you are eligible for the certificate based on your estimated total tax liability for the relevant financial year. If your estimated tax liability is lower than the tax that would be deducted at source, you may be eligible for the certificate.
2. Submit Form 13: You need to submit Form 13 to the Assessing Officer (AO) of your jurisdiction. This form includes details such as your PAN, estimated income and tax liability, and the reasons why you are seeking the certificate.
3. Wait for verification: The AO will verify the information provided in Form 13 and may ask for additional information or documents. Once satisfied, the AO will issue the certificate.
4. Provide the certificate to the payer: You need to provide the certificate to the payer (e.g. your employer or the entity making the payment to you) to ensure that tax is not deducted at source or is deducted at the lower rate specified in the certificate.
It’s important to note that the certificate is valid only for the financial year for which it is issued and for the specific source of income mentioned in the certificate. You need to apply for a new certificate each year and for each source of income.
How long is TDS exemption certificate valid?
A TDS exemption certificate or a certificate under section 197 of the Income Tax Act is valid for the financial year for which it is issued and only for the specified source of income mentioned in the certificate, and its validity is determined by the Assessing Officer who issues it.
What is lower deduction of TDS?
Section 197 of the Income Tax Act provides that if the amount of TDS being deducted is more than the total tax liability of the person, they can apply to the Income Tax Officer for a certificate of Nil/Lower TDS deduction.